Repayment Under Claim of Right IRC 1341

A Claim of Right Repayment is a deduction or credit that you may be eligible for in the current tax year. If you reported income in a previous year but later had to repay it because it was paid in error, you may be able to either reduce your current-year income or take a tax credit in the year of repayment.

Important: You must calculate the amount of your deduction or credit following the IRS methods outlined in Publication 525. Be sure to calculate the correct deduction or credit amount following IRS guidelines, DO NOT enter the repayment amount directly.

Qualifying for the Deduction or Credit

• The repayment must exceed $3,000 to qualify for the deduction or credit under IRS Section 1341.
  • If the repayment qualifies, you have two options:
  • Reduce your income for the current year (deduction).
  • Claim a refundable credit on Form 1040 for the year the repayment occurred.
• If the repayment was $3,000 or less, Section 1341 does not apply. Instead, the repayment is generally deducted on the same form or schedule where it was originally reported (e.g., Schedule C for self-employment income).

Note: If the income was previously reported as wages, unemployment compensation, or other nonbusiness income, it cannot reduce current-year income directly. Instead, it is deducted as a miscellaneous itemized deduction on Schedule A, subject to the 2% of adjusted gross income limitation.

How to Determine the Deduction or Credit

You must use both methods below to determine which option results in the least tax.

Method 1 – Deduction
Calculate your tax for the repayment year including a deduction for the amount repaid (must be greater than $3,000).

Method 2 – Credit

1. Step 1: Figure your tax for the repayment year without deducting the repayment amount.
2. Step 2: Recalculate your tax from the earlier year excluding the income you repaid in the repayment year.
3. Step 3: Subtract the recalculated tax (Step 2) from the original tax on your earlier return. This is the credit amount.
4. Step 4: Subtract the credit amount from your current-year tax calculated in Step 1.

Compare Your Results

• If Method 1 results in the least tax, deduct the repayment amount on:

Federal Section > Itemized Deductions > Other Itemized Deductions > Repayment under Claim of Right (if greater than $3,000).

• If Method 2 results in the least tax, claim the credit amount on:

Form 1040 or 1040-SR (Federal Section > Payments & Estimates > IRC 1341 Repayment Amount).

Reminder: You must calculate the correct deduction or credit as outlined in Publication 525. Entering the repayment amount without performing these steps may result in an incorrect tax return.

Tax Return Reporting

Enter the amount based on your calculations above- do not enter the full dollar amount repaid. 

Deduction

To claim the deduction, go to the Federal Section > Deductions > Itemized Deductions > Other Itemized Deductions > Repayment under claim of right (if greater than $3,000).

Credit

To claim the credit, go to the Federal Section > Payments & Estimates > IRS 1341 Repayment Amount.